Amlak’s latest restructuring is just what Dubai finance company needs

In ascertaining the intrinsic value of any company - simply put, the discounted value of the cash that can be taken out of the business during its remaining life - there is often some degree of confusion, through conflating it to its book value.

The former is at best a fuzzy number, but the change in the book value of the company is approximately equal to the change in its intrinsic value. This is where the market often gets it wrong, especially in the case of companies that have fallen on lean times. (Restructurings have a storied history in the UAE).

Such has been the case with Amlak. However, the resurgence of the company’s share price - up nearly 5 fold in the last 5 years, handily beating the DFM index - is a testament to its management, which is key in determining its intrinsic value.

Central to this has been the company’s recent sale of its land bank in Ras Al Khor and restructuring its business activity to focus on the demand for traditional Islamic consumer, trade and construction finance. Along with Union Properties - another example of a proactive management that has repositioned and restructured its business - Amlak represents a classical example of aggregate gains that ultimately flow to the shareholders as the business refocuses its activities.

Given its strong shareholder backing, such cases are eye candy for long-term investors and far removed from the euphoria surrounding the Western equity markets. (Bizarrely, there has been commentary suggesting that new highs and higher valuations are itself a bullish sign for further upsides.)

This kind of thinking conflates speculation with investment, and although the lines between the two are never bright, it is clear that nothing sedates rationality like large doses of effortless money being made. Especially when operating under the maxim of ‘buy the dip’.

This is normally accompanied by loose talk such as value creation, when in actuality what is occurring is wealth transfer. Value creation can only occur when the underlying business makes money. In the case of Amlak, after its cascading series of decisions, this has now become the case after years of restructuring, even as it was clear that the value of the assets that it held was far higher than what the book value was stating.

The shareholder approval of its restructuring further infuses value on a sustainable basis going forward. So, the scene has been set for investors to capitalize as the company continues to add to its intrinsic value, putting it on a sustainable and clearly defined path.

As far as the euphoria in asset prices of the West are concerned, it is worthwhile to remember that a pin lies in wait for every bubble. When the two eventually meet (as they must), investors will learn the old-fashioned way that speculation is most dangerous when it looks easiest.

In the UAE capital markets, there remain examples abound of shareholder value in companies yet to be discovered by the markets. Unlike in most of the Western equity markets, where, despite a sustained dollar decline, markets continue to reward behavior that can only be considered frothy, to put it charitably.

It must be remembered that the most promising returns have been negotiated transactions for businesses that operate under severe constraints and are able to survive and therefore prosper. As has been the case with the likes of Amlak and UPP.

For the most part in the Western capital as well as real estate markets, we are 180 degrees from this point.